Welcome to July edition of the Burrell Blog for 2016!
It is submitted the following are flawed policies:
Superannuation $25,000 concessional contribution Cap
The papers carried stories of retiring politicians recently, some receiving pensions of $300,000pa. If a capital sum were being accumulated to fund such an amount, then at 5% $6M would be required while at 10% $3M would be required. Let’s split the difference, at 7.5% an amount $4.5M would be required and the government as employer would have been contributing $500,000pa in the last term of these parliamentarians to fund this amount.
Against this, it is absurd to expect support for a $25,000 concessional contribution cap for the remainder of the population.
One understands that the parliamentary scheme has changed and that the previous incorrect assumption that a pension should be funded equal to 75% of earnings has been revised going forward for new parliamentarians. However the assumptions made by Treasury in support of $25,000 are equally flawed. The reality is that Australians are not interested in superannuation in their twenties, have mortgages in their thirties, education and other maintenance expenses for children in their forties and the majority of Australians make no serious attempt to accumulate superannuation until their fifties. So the first assumption which is absurd is that people will fund superannuation equally throughout their working life.
Given this truncated funding period, there needs to be a recognition that Australians will require higher deductions in the last 15 years of their working life. Long before the law makers began playing with the superannuation guide posts, there was a simple calculation which allowed one to fund seven times final average salary (FAS). Any accountant or financial planner or other superannuation advisor would easily take the existing entitlement to superannuation, calculate seven times FAS and then a table allowed for the calculation of the contribution for that year. This is commended for consideration.
At the very least, it is submitted that the $35,000 currently should be retained and in any event is most likely too low.
Superannuation – Other measures
One of the objectives from recent discussions is for superannuation for females to become more equal to that for males. An amount of $1.6M was proposed as the maximum capital amount for any person. It will go a long way to addressing the concern in respect of this measure if a couple were able to easily split their superannuation in the proportion that might be agreed. Currently superannuation splitting is only possible on a year-by-year basis in respect of the contributions for that year.
Company tax rate
It is submitted that the methodology whereby the company tax rate is set equal to the median personal individual tax rate is correct. This was a central feature of the system when enacted. This means that the middle tax rate should be reduced to 30% and the company tax rate should remain at 30%.
If companies wish to operate in Australia, have their people reside in Australia, have their people educated in Australia, have their people subject to the health and social security services in Australia, then they need to pay their proper share of tax.
One understands that there has been a tendency overseas to reduce company tax rates. Certainly the USA have lower scheduled company tax rates, but they also have lower levels of social security and services and greater inequality. The UK chancellor in recent times has also added to the pressure for lower company tax rates, although, there is now a new Chancellor. This trend is unfortunate as in Australia it may inevitably lead to the loss of the franking system and ultimately the introduction of inheritance taxes.
During the debate there was no word from Treasury in support of the franking system. The franking system is demonstrably superior in the allocation of capital to the USA system. In the USA with the double taxation of dividends, companies pay low dividends, on average only a 2% dividend yield, they pay their executives excessive amounts with the surplus cash and then make excessively priced takeovers so as to show growth in the companies.
The Australian system where companies pay fully franked dividends results in much higher levels of dividend which can support the retirement incomes of Australians. Capital is more efficiently allocated because if a company then has a project they come to the market and we arrange funding for that project or that capital raising.
In a number of comparisons, one is comparing apples and oranges. For example in the USA States impose various levels of taxes and the majority of overseas countries do not have franking. Franking is the superior system and we should not be bluffed into giving up a better system because those overseas have not adopted it. The Australian superannuation system was shown to be superior to that in the USA during the Global Financial Crisis. It may be the GFC would not have occurred if the Australian superannuation systems existed in the USA. Their inferior systems and lack of franking meant that USA taxpayers had much higher amounts in hedge funds and other funds looking for excessive returns, whereas in Australia that money was invested in lower risk superannuation with longer term investment horizons.
In summary, it is submitted that the above recent policies are flawed.
The other themes for 2016 are also a helpful guide post and are listed below.
Themes for 2016
↗ Dividend yield driver
↗ Interest rate cycle headwind
o Central banks in different parts of the cycle
↗ Segment stocks in Burrell Universe into four segments
o Other high yield, but steady/lower growth
o High growth & sound business model, management, Balance Sheet, ROE > 10%
↗ Adopt a realistic view on China, not a sentiment view
o Markets wholly reactive to China as a proxy to demand growth for energy & mineral resources. There is relatively well developed themes so looking for inflection points in calendar 2016.
↗ US economy and the USD
↗ Digital disruption and competition
↗ Australia innovation stocks: medical appliances; global champions
↗ Weaker resources sector = lower A$ = Mergers & Acquisitions (M&A)
↗ Deloitte Fantastic Five: agribusiness, gas, tourism, international education and wealth management
↗ Property: more positive moves driven by low interest rates, demand and low valuations
↗ Possible X factors
A. US stock market valuations and possible correction
B. $20 oil
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